Industry says Basel changes need to go further
The Basel Committee has not gone far enough in its review of trade finance under incoming regulations, say prominent industry figures.
Trade bankers enjoyed one of their first wins in their battle against Basel III this week as the committee announced plans to waive the one-year maturity floor for letters of credit and to waive the sovereign floor for certain trade finance-related claims on banks.
While the changes are welcome, Dan Taylor, JP Morgan treasury and securities services’ global infrastructure manager and vice-chairman of the ICC banking commission, tells GTR that they do not go far enough: “We definitely welcome the changes and the attention that Basel has put to this issue.
“Clearly this is a step in the right direction, but we think there’s more that can be done. We think what we’ve seen here leaves the door open to more dialogue and we hope that an opportunity still exists with the Basel Committee to talk some more.”
Taylor explains that due to some countries, such as the UK, using their own discretion in waiving maturity floor regulations for a broad spectrum of trade products, the new proposals from Basel, which only exempt letters of credit, could have a large effect on trade:
“The changes to the maturity floor will probably have the biggest impact on banks. But the Basel Committee restricted it to letters of credit.
“Currently, many countries have actually waived the maturity floor more broadly for trade products as opposed to just letters of credit, so if regulators adopt the new Basel proposals it could make a quite different environment from what we are operating in today.”
The main sticking point for trade finance bankers remains the contentious leverage ratio proposals.
Under Basel II, leverage ratios sat at 20% for trade-related contingencies, such as letters of credit and shipping guarantees, and 50% for transaction-related contingencies, including performance guarantees.
But the Basel Committee has stated that the implementation of Basel III will see the credit conversion factors of all off-balance sheet exposures increased five-fold to 100%.
This one-size-fits-all approach lumps the historically low-risk trade finance product in with high-risk items such as credit default swaps.
The news from the Basel Committee came a day before the ICC released its second annual report detailing quantitative data from trade finance transactions from 14 banks.
This is double the amount of banks that signed up to the last survey.
Of 11 million transactions, equal to 65% of the world’s trade finance transactions, there were only 3,000 defaults.
“[The survey has] been expanded from the first study with double the number of financial institutions participating in it and covering a longer period,” says Taylor.
“Actually, the results are not much different from what we saw in the first report. Most of the default and loss ratios actually went down as we included more banks in the study.
“We see more interest in the study from the banks. It took us a while to get it together but we’re looking at six-years’ worth of data and an awful lot covers the 2008, 2009 and 2010 years, which were the peak of the crisis, and we think the data is really good at representing what was happening in the industry during that period.”